Hertsel Shadian, Attorney at Law, LLC

Archive for the ‘IRS/Tax Articles’ Category

IRS Announces Simplified Option for Claiming Home Office Deduction Starting in 2013

16 January 2013 | Hertsel Shadian

The Internal Revenue Service, on January 15, 2013, announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes. In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction). The IRS estimated that the new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record-keeping burden on small businesses by 1.6 million hours annually.

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829), often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form. Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible. Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. The new simplified option is available starting with the 2013 return most taxpayers file early in 2014.

For more information about the home office deduction, and more generally the amounts and types of deductions which might be available in your specific situation, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Further details on the new option to claim the home office deduction also can be found in Revenue Procedure 2013-13, posted on www.IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after January 1, 2013. Please also feel free to share this article with others that might benefit from this information.

Tax Tips for Recent Newlyweds

17 August 2012 | Hertsel Shadian

Late spring and summer always are popular times for a wedding. If you recently were married, there are several changes that also might be necessary with regard to your tax filing status. Remember that even if the planning for your wedding is over, you still cannot forget about planning for the tax-related changes that marriage brings. Following are some tips for recently married taxpayers related to updating your name, address and tax filing status following a marriage, as well as other tips to remember. (Note that some of these tips also are equally applicable for people that are recently divorced.)

  • Notify the Social Security Administration. It is important that your name and Social Security number match on your next tax return, so if you have taken on a new name, report the change to the Social Security Administration. File Form SS-5, Application for a Social Security Card (for applicants in the U.S.), Form SS-5-SP, Application for a Social Security Card (for Spanish speaking applicants who have difficulty translating the SS-5), or Form SS-5-FS, Application for a Social Security Card (for applicants applying outside the United States). The forms also can be obtained on the SSA’s official website at www.SSA.gov, by calling 800-772-1213, or by visiting a local SSA office. For additional tips and useful links related to making a name change following a marriage or divorce, see the article, Five Tax Filing Tips for Recently Married or Divorced Taxpayers.”
  • Notify the IRS if you move. IRS Form 8822, Change of Address (link also below), is the official way to update the IRS of your address change. Download Form 8822 using the link below or directly from the official IRS website at www.IRS.gov, or order it by telephone by calling 800-TAX-FORM (800-829-3676).
  • Notify the U.S. Postal Service.  To ensure your mail—including mail from the IRS—all is forwarded to your new address, you will need to notify the U.S. Postal Service. Submit a forwarding request online at www.USPS.com, or visit your local post office.
  • Notify your employers of any address changes.  Report any name and address changes to your employer or employers to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  • Check your withholding.  If both spouses work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. You can use IRS Publication 505, Tax Withholding and Estimated Tax (link also below), to help determine the correct amount of withholding for your marital status, and it also will help you complete a new IRS Form W-4, Employee’s Withholding Allowance Certificate. Fill out and print Form W-4 online and give it to your employers so that the correct amount will be withheld from your pay.
  • Select the right tax form.  Choose your individual income tax form wisely because it can help save you taxes. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns rather than taking the standard deduction. Itemized deductions must be claimed on a Form 1040, not on a Form 1040A or Form 1040EZ.
  • Choose the best filing status. A person’s marital status on Dec. 31 determines whether the person is considered married for that year for tax purposes. Tax law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Calculating the tax both ways can determine which filing status will result in the lowest tax, but filing jointly is usually more beneficial.

For more information about these topics, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. More information about changing your name, address and income tax withholding is available on the official IRS website at www.IRS.gov, and by using the links below. IRS forms and publications also can be obtained from www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). Please also feel free to share this article with others you know that might benefit from this information.

IRS Links:

  • Form 8822, Change of Address (PDF)
  • Form W-4, Employee’s Withholding Allowance Certificate (PDF)
  • Publication 505, Tax Withholding and Estimated Tax (PDF)

IRS YouTube Videos:

IRS Podcasts:

Don’t Overlook the Benefits of Miscellaneous Deductions

13 August 2012 | Hertsel Shadian

The Internal Revenue Service recently sent out a reminder about the benefits of miscellaneous deductions, as well as some basic rules to remember in claiming miscellaneous deductions. For those taxpayers that are able to itemize their deductions on their tax return instead of claiming the standard deduction, they may be able to claim the benefits of certain miscellaneous deductions. Remember that a tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay. Following are some things to know about miscellaneous tax deductions:

Deductions Which are Subject to a 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:

  • Unreimbursed employee expenses, such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation. To be deductible, the expenses must be:
    • Paid or incurred in the tax year,
    • Used for carrying on your trade or business of being an employee, and,
    • Considered ordinary and necessary.
  • Tax preparation fees.
  • Other expenses that you pay to:
    • Produce or collect taxable income,
    • Manage, conserve, or maintain property held to produce taxable income, or
    • Determine, contest, pay, or claim a refund of any tax.

Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income, and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.

Deductions Which are Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:

  • Casualty and theft losses from income-producing property, such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
  • Gambling losses up to the amount of gambling winnings.
  • Impairment-related work expenses of persons with disabilities.
  • Losses from Ponzi-type investment schemes.

Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions, which is available on the official IRS website along with Instructions for Schedule A. If you plan to utilize the benefits of these miscellaneous deductions, then it is important to remember that you also should keep complete and accurate records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives, as well as to be able to substantiate the deductions if your tax return ever is selected for examination by the IRS. In fact, review and substantiation of miscellaneous deductions is a frequent subject of IRS examinations. Note also that there are many expenses which you cannot deduct, such as personal living or family expenses.

For more information about the amounts and types of deductions which might be available in your specific situation, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. You also can find more information and examples in IRS Publication 529, Miscellaneous Deductions, which is available on the official IRS website at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). Please also feel free to share this article with others that might benefit from this information.

IRS Links:

  • Publication 529, Miscellaneous Deductions (PDF)
  • Schedule A, Itemized Deductions (PDF)
  • Instructions for Schedule A (PDF)

IRS YouTube Videos:

IRS Podcasts:

Tax Tips on Renting Your Vacation Home

2 August 2012 | Hertsel Shadian

For those that own vacation homes, summer is the time to get away to those homes on a long weekend, or even to invite friends and family. Others choose to maximize the value of a second home by finding short-term renters. It is important to remember that income that you receive for the rental of your vacation home generally must be reported on your federal income tax return. However, if you rent the property for only a short time each year, you may not be required to report the rental income. Following are some tips on reporting rental income from a vacation home, such as a house, apartment, condominium, mobile home or boat:

Rental Income and Expenses.  Rental income, as well as certain rental expenses that can be deducted, normally are reported on Schedule E, Supplemental Income and Loss.

Limitation on Vacation Home Rentals.  When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income. You are considered to use the property as a residence if your own personal use during the calendar year is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, then the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.

Special Rule for Limited Rental Use.   If you use a vacation home as a residence and rent it for fewer than 15 days in a year, then you do not have to report any of the rental income. Schedule A, Itemized Deductions, may be used to report regularly deductible personal expenses, such as qualified mortgage interest, property taxes, and casualty losses.

For more information about rental income, deductions, and exclusions, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Additional information can be found in IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes), which is available on the IRS website at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). The booklet offers more information about rental property, including special rules about personal use and how to report rental income and expenses. Please also feel free to share this article with others that might benefit from this information.

Job Search Expenses Can be Tax Deductible

19 July 2012 | Hertsel Shadian

For many people, summertime is the season that often leads to major life decisions, such as moving, buying a home, or a job change. If you are one of the many people looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return. While the amount and scope of the deduction is limited, this could be a helpful benefit for a taxpayer that otherwise must spend money on job search expenses. The key to getting a deduction for such expenses is keeping good, contemporaneous records. The expenses generally are deductible whether or not you get the job. Following are seven things the IRS recently reminded taxpayers to remember about deducting costs related to a job search:

1. To qualify for a deduction, the expense must be spent on a job search in the taxpayer’s current occupation. Taxpayers may not deduct expenses incurred while looking for a job in a new occupation.

2. Taxpayers can deduct employment and outplacement agency fees paid while looking for a job in the taxpayer’s present occupation. If a taxpayer’s employer pays the taxpayer back in a later year for employment agency fees, then the taxpayer must include the amount received in the taxpayer’s gross income, up to the amount of the tax benefit received in the earlier year.

3. Taxpayers can deduct amounts spent for preparing and mailing copies of résumés to prospective employers, as long as the taxpayer is looking for a new job in the taxpayer’s present occupation. This would inlcude the costs of typing, printing, copying and postage.

4. If a taxpayer travels to look for a new job in the taxpayer’s present occupation, then the taxpayer may be able to deduct travel expenses to and from the area to which the taxpayer travelled. This includes any local transportation and travel away from home. A taxpayer only can deduct the travel expenses if the trip is primarily to look for a new job. The amount of time a taxpayer spends on personal activity unrelated to the job search compared to the amount of time spent looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. The taxpayer should keep a mileage log for vehicle transportation or other appropriate receipts to substantiate the cost of the travel and the primary purpose as being for a job search.

5. A key restriction on the deduction for job search expenses is that a taxpayer cannot deduct such expenses if there was a substantial break—e.g., several years—between the end of the taxpayer’s last job and the time the taxpayer begins looking for a new one.

6. Unfortunately, a taxpayer also cannot deduct job search expenses if the taxpayer is looking for a job for the first time.

7. The amount of job search expenses that a taxpayer can claim also is limited. To determine the available deduction amount, a taxpayer needs to use Schedule A, Itemized Deductions (see link below). Job search expenses should be claimed as a miscellaneous itemized deduction and the total of all miscellaneous deductions must be more than two percent of the taxpayer’s adjusted gross income.

For more information about the deduction for job search expenses, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985, or see IRS Publication 529, Miscellaneous Deductions (link below). This publication also is available on www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). Please also feel free to share this article with others you know that might benefit from this information.

Links:

Six Facts for Adoptive Parents Claiming Federal Adoption Tax Credit

6 April 2012 | Hertsel Shadian

If you paid expenses to adopt an eligible child in 2011, you may be able to claim a federal tax credit of up to $13,360 on your U.S. income tax return. Here are six facts you should know related to claiming the expanded adoption credit for federal income tax purposes:

1. Refundable Credit. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.

2. Filing. For tax year 2011, you must file a paper tax return, along with IRS Form 8839, Qualified Adoption Expenses (see links below for form and instructions), and also attach documents supporting the adoption. Taxpayers claiming the credit still will be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.

3. Documents. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state’s determination for special needs children.

4. Eligible Expenses. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. Eligible Child. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. Applicable AGI Limits. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.

For more information about the federal adoption credit, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Additional information also can be found on the IRS’s Adoption Credit FAQ page (see link below) at www.IRS.gov, or in the instructions to IRS Form 8839 (link below), which form and instructions also can be downloaded from the IRS website directly or ordered from the IRS by calling 800-TAX-FORM (800-829-3676). Please also feel free to share this article with others that might benefit from this information.

Links:

YouTube Video:

Eight Essential Rules for Deducting Charitable Contributions

5 April 2012 | Hertsel Shadian

Donations made to qualified organizations may help reduce the amount of tax you pay.  As a tax-time reminder, following are eight essential tips to help ensure your charitable contributions pay off on your tax return.

1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.

2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you also must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. (See also, Instructions to Form 8283.)

3. If you receive a benefit because of your contribution—such as merchandise, tickets to a ball game, or other goods and services—then generally you can deduct only the amount that exceeds the fair market value of the benefit received.

4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items generally must be in good used condition or better to be deductible. Special rules apply to vehicle donations.

5. Fair market value generally is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.

7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.

8. Taxpayers donating an item or a group of similar items valued at more than $5,000 also must complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Taxpayers also can refer to IRS Form 8283, Noncash Charitable Contributions and the Instructions to Form 8283, as well as IRS Publication 526, Charitable Contributions. For information on determining the value of donations, refer to IRS Publication 561, Determining the Value of Donated Property. All are available at the official IRS website at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). Please feel free to share this article with others that might benefit from this information.

Tax Tips Related to Farm Income and Deductions

3 April 2012 | Hertsel Shadian

A taxpayer is in the business of farming if he or she cultivates, operates or manages a farm for profit, either as an owner or as a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. A farm also includes plantations, ranches, ranges and orchards. Following are 10 key points for farmers in regard to federal income taxes.

1. Crop insurance proceeds. Farmers must include in income any crop insurance proceeds which they receive as the result of crop damage. Farmers generally include those proceeds in the year they receive them.
2. Sales caused by weather-related condition. If a farmer sells more livestock, including poultry, than he or she normally would in a year because of weather-related conditions, he or she may be able to postpone until the next year the reporting of the gain from selling the additional animals.
3. Farm income averaging. Farmers may be able to average all or some of their current year’s farm income by allocating that income to the three prior years. This may lower a farmer’s current year tax if their current year income from farming is high, and their taxable income from one or more of the three prior years was low. This method does not change a prior year tax, it only uses the prior year information to determine a farmer’s current year tax.
4. Deductible farm expenses. The ordinary and necessary costs of operating a farm for profit are deductible business expenses.  An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
5. Employees and hired help. A farmer can deduct reasonable wages paid for labor hired to perform his or her farming operations. This includes full-time and part-time workers. Farmers must withhold Social Security, Medicare and income taxes for employees.
6. Items purchased for resale. A farmer also may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.
7. Net operating losses. If a farmer’s deductible expenses from operating his or her farm are more than their other income for the year, the farmer may have a net operating loss. Like other taxpayers, farmers can carry that loss over to other years and deduct it. A farmer also may get a refund of part or all of the income tax he or she paid for past years, or may be able to reduce his or her tax in future years.
8. Repayment of loans. A farmer cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if the proceeds of the loan are used for the farming business, a farmer can deduct the interest that he or she pays on the loan.
9. Fuel and road use. A farmer may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.
10. Farmers Tax Guide. More information about farm income and deductions is available in IRS Publication 225, Farmer’s Tax Guide, which is available at the official IRS website at www.IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).

For more information about this topic, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Please also feel free to share this article with others that might benefit from this information.

Tax Tips for U.S. Taxpayers with Foreign Income

20 March 2012 | Hertsel Shadian

U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2011, might have a U.S. tax liability and a filing requirement in 2012. Following are some tips from the IRS for U.S. taxpayers with foreign income:

1. Filing deadline. U.S. citizens and resident aliens residing overseas or those serving in the military outside the U.S. on the regular due date of their tax return have until June 15, 2012 to file their federal income tax return. To use this automatic two-month extension beyond the regular April 17, 2012 deadline, taxpayers must attach a statement to their return explaining which of the two situations above qualifies them for the extension. An initial automatic extension to file and pay goes to and includes June 15th, with an additional four-month extension to file only (not pay) available upon request using IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
2. World-wide income. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.
3. Tax forms. In most cases, affected taxpayers need to fill out and attach Schedule B, Interest and Ordinary Dividends, to their tax return. Certain taxpayers also might have to fill out and attach to their tax return the new IRS Form 8938, Statement of Foreign Financial Assets. [See also, Instructions to Form 8938]. In addition, some taxpayers also might have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Treasury Department by June 30, 2012, to report amounts in foreign bank and financial accounts. Stiff penalties can apply for the failure to file the necessary forms.
4. Foreign earned income exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. If you qualify for tax year 2011, this exclusion enables you to exempt up to $92,900 of wages and other foreign earned income from U.S. tax.
5. Credits and deductions. You may be able to take either a credit or a deduction for income taxes paid to a foreign country or a U.S. possession. This benefit is designed to lessen the tax burden that results when both the U.S. and another country tax income from that country.
6. Free File. Taxpayers abroad now also can use IRS Free File. This means U.S. citizens and resident aliens living abroad with adjusted gross income of $57,000 or less can use brand-name software to prepare their returns and then electronically file them for free.
7. Tax help. If you live outside the U.S., the IRS has full-time permanent staff in four U.S. embassies and consulates. A list is available on the official IRS Website (www.IRS.gov) in the “Contact Your Local Office Section,” under International. These offices have tax forms and publications that can help you with filing issues and answer your questions about notices and bills.

For more information about this topic, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. More information also is available in IRS Publication 4261, Do You Have a Foreign Financial Account? IRS publications, forms and more information on topics useful to individual international taxpayers can be found on the International Taxpayer page on the IRS website. Please feel free to share this article with others that might benefit from this information.

IRS Announces Voluntary Worker Classification Settlement Program

26 February 2012 | Hertsel Shadian

As announced in the latter part of 2011, the Internal Revenue Service (IRS) has developed a new program to permit taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes. The Voluntary Classification Settlement Program (VCSP) allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes and obtain relief similar to that obtained in the existing Classification Settlement Program (CSP). The VCSP is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past non-employee treatment. To participate in the program, the taxpayer must meet certain eligibility requirements, apply to participate in VCSP, and enter into a closing agreement with the IRS.

I. BACKGROUND

Whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances and is generally determined under the common law test of whether the service recipient has the right to direct and control the worker as to how to perform the services. In some factual situations, the determination of the proper worker classification status under the common law may not be clear. For taxpayers under IRS examination, the current CSP is available to resolve federal employment tax issues related to worker misclassification, if certain criteria are met. The examination CSP permits the prospective reclassification of workers as employees, with reduced federal employment tax liabilities for past non-employee treatment. The CSP allows business and tax examiners to resolve the worker classification issues as early in the administrative process as possible, thereby reducing taxpayer burden and providing efficiencies for both the taxpayer and the government.

In order to facilitate voluntary resolution of worker classification issues and achieve the resulting benefits of increased tax compliance and certainty for taxpayers, workers and the government, the IRS determined that it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes.

II. ELIGIBILITY

The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other non-employees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as non-employees, and must have filed all required Forms 1099 for the workers for the previous three years. The taxpayer cannot currently be under audit by the IRS. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if the taxpayer has complied with the results of that audit.

III. EFFECT OF VCSP

A taxpayer who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer (1) will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509 of the Internal Revenue Code; (2) will not be liable for any interest and penalties on the liability; and (3) will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. Additionally, a taxpayer participating in the VCSP will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

IV. APPLICATION PROCESS

Eligible taxpayers who wish to participate in the VCSP must submit an application for participation in the program. Information about the VCSP and the application now is available on the official IRS website at www.IRS.gov. Taxpayers should use IRS Form 8952 to apply for the Voluntary Classification Settlement Program. For more information, see the following link: Instructions for Completion of Form 8952. Along with the application, the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848) should be provided. The IRS will contact the taxpayer or authorized representative to complete the process once it has reviewed the application and verified the taxpayer’s eligibility. The IRS retains discretion whether to accept a taxpayer’s application for the VCSP. Taxpayers whose application has been accepted will enter into a closing agreement with the IRS to finalize the terms of the VCSP and will simultaneously make full and complete payment of any amount due under the closing agreement. Payment should not be enclosed with the application.

For further information about this IRS program or other employment or business tax issues, contact your professional tax advisor, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Please also feel free to share this article with others that might benefit from this information.